I HOLD THIS TRUTH TO BE SELF-EVIDENT, THAT A DEBT CRISIS CANNOT BE RESOLVED WITH MORE DEBT

Wednesday, December 17, 2008

Fishing For Sectors

Two of the largest sectors of the US economy are housing and automobiles. Both are reeling (see charts below).

Looking at the charts, we observe that both industries had been on a more or less continuous uptrend since 1990-92 - until they jumped off the cliff in 2007. What happened? It's quite simple, really: houses and autos are the #1 and #2 most significant purchases people make in their lifetimes, usually financing both. That's where easy-easier-easiest credit came in: in just a few years household debt as a percentage of GDP jumped from 67% to nearly 100% (see chart below).In other words, between 2000 and 2007 we over-borrowed and over-spent on houses and cars, satisfying future demand for many years to come. No matter how low the Fed takes its rates (a record low 0.0% - 0.25% as of yesterday), people are not going to rush to borrow to buy such big-ticket, long-lasting items anytime soon. They do not need them, because they've already bought them. It follows that household lending - the driving force behind finance in recent years - is also going to be down on its heels for many years.

Conclusion: don't go bottom-fishing in these sectors just yet. Instead, investors will be better off looking for The Next Big Thing. What's that? My bet is on alternative energy and everything that revolves around it, such as smart electricity grids. A wholesale shift from "black" to "green" will necessarily require massive investment and will, also necessarily, lead to a shift from consumption to saving, in order to finance it. This will pose significant challenges to the retail and traditional services sectors, too.

I fully expect a long period of massive Creative Destruction to unfold, i.e. OPPORTUNITY. Any and all ideas from readers are welcome..

It is quite likely, IMO, that Oil will do some "boxcar oscillation" because OPEC will cut production, after some delay production slams into the rigid demand, then OPEC increases again but the increase has to feed trough the pipelines.

This will slam oil up to maybe USD 200 then a fall to maybe 40'ish e.t.c. but persistently wiping out stocks at the same time.

... Or maybe some country goes tits-up. Ecuador just decided to default.

Anyways - what screws it up for me is that any gains in the market will be lost on the USD.

.The chronology of these curves is astoundingly similar to the the chronology described by Harry Dent in the Great Boom Ahead written end of 1992, published in 1993.

He foresaw the great boom until 2006/2008. Then the worst depression in the history of the US until about 2020/2022. But interestingly his theory was only based on the pyramid of age of the american population and statistics on the age in life when one has the necessity and/or desire to consume most.

According to him this age was 48. Add this to the beginning of the end of the baby boom in 1958 and you get 2006!

One more point was that the US and european economies would decouple from this point on as the european baby boom lasted another 15 years or so.

And in order to come back on topic, among other things Harry thought about commercial space flights for the 2050's (and I do not agree, but who knows?).

There printing dollars as we read this. I am not buying or selling shit until second or third quarter earnings release. Hell as not fully unleashed itself on the marginal players. Consumers must heal as such. I have saved over 10 percent for decades and the cheerfull idiots have lost half or more do to risk assesment's failures. It's not that government has lacked information needed to fix the problem. It is institutionally incapable of bringing about the desired result, since the principles of profit and loss, private property and contract, enterprise and entrepreneurship, do not exist in government. Government operates with an eye to its own short-term survival, and those of its connected interest groups, and nothing else so bubble there hellasious since alpha is your alpo now? For America to move forward we would need:125% of Americans or more now to invest in the stock market. Taxes to get cut in half from here. Democratic economic theory has been: "If moves tax it, if it keeps moving regulate it, if it stops moving subsidize it."Where going nowhere........ Recognize that government invasion of public power is eventually an assault upon your own business as it was mine and I shut down and kept my Corporate work. The ten-year Treasury to repeat its steady descent of over 11 percentage points from a starting point of 5% To make the small print perfectly clear, this shows the rally in the Dow Jones Industrial Average over the past 4 years of +13%. But if you lived anywhere else with the other 95% of the world’s population that same investment cost you (24%) in the declining value of the dollar. By the time you converted your dollar profits into local currency you were, on average, net negative – 11%, during this “rally.” The winds of change have spoken. I’ll wager none of those can happen according to the only crystal ball that works – simple math. I have written my Senate. There idiots plain and simple to date. No vision, no innovation, no clue for decades to this epic failure. As for investments? In the end, there was no money left to pay the army, build forts or ships, or protect the frontier. The barbarian invasions, which were the final blow to the Roman state in the fifth century, were simply the culmination of three centuries of deterioration in the fiscal capacity of the state to defend itself. Indeed, many Romans welcomed the barbarians as saviors from the onerous tax burden. In conclusion, the fall of Rome was fundamentally due to economic deterioration resulting from excessive taxation, inflation, and over-regulation. Higher and higher taxes failed to raise additional revenues because wealthier taxpayers could evade such taxes while the middle class--and its taxpaying capacity--were exterminated.

If your analysis is correct, wouldn't the better advice be to just continuing shorting those things you truly believe will fall further? Isn't it better to invest in what you 'know' than what you hope?

If you are looking to make a lot of money, and the world is moving to revalue the importance of earned labor to pay off all the debt, it seems to me investing in those things that improve productivity in sectors where there is already lots of labor is likely to do better. Remember,once upon a time, the computer replaced people. Microsoft allowed this to occur.

So I like alternative energies from an emotional standpoint, and I agree with you that a carbon tax would spur productivity changes in the use of energy, but I think the better trends are in labor. Just like in the American restructuring of the 1980's, with the explosive growth of the Manpower inc's of the world (it was EMCARE in my industry), the big money will be made in the companies of tomorrow that figure out how to further specialize labor and get those specialists to work well together as a team. It will be all about improving labor productivity even more.

For the political conspiracy types on this blog, think of these new companies as the latest iterations of the labor union, only the entities would be far more sinister, being as they are 'corporate' and operate on a for profit motive (whereas we all know unions never had such evil motives)

We are in the early stages of the mother of all collapses in our nation's history. This is going to give additional freedom to the Obama Administration (OA) to try many things.

I agree. I think alternative energy is going to be the basis going forward. I look to see the OA revamp the tax code to encourage corporate and personal savings, investment in alternative energies, and all kinds of schemes to weatherize homes, install solar, reduce water consumption, etc. Also, look for a massive investment in passenger rail and other forms of local mass transit.

The new ethic going forward will be: savings, sacrifice, investment in the commons, research and development, accountability.

If we don't take that path, given where we are right now and the track we are currently on, we are totally screwed. Game over.

I don't think most people understand this. Most of the 50 and under population (a lot of people), who don't know a world without easy, available credit, don't have any living experience of a world "without" those conveniences. This group is in for an especially tough time.

Regardless of what's done, it's going to get a lot worse before it gets better.

Indeed, but when one has said that, as you have, one has said a great deal.

I refer you all to the articles of Professor Antal Fekete regarding the backwardation in gold futures and its profound meaning. The dollar is as doomed a currency as exists, that is to say it is doomed to persistent debasement until such time as there is a crisis of the sort that spawns what occurred in places like Weimar Germany and Argentina.

When (not if) the dollar's reserve currency status is terminated, and that could literally come at any time in a whole host of ways, i.e. OPEC decides to accept only Euros as payment, it will be game over for all dollar denominated investments.

I doubt there will be a next big thing anytime soon, but betting on resource plays ought to do as a substitute within the next 5 years.

I do not believe the golden age is coming next week. The golden age will come when the deflationary period is exausted, and the monetary system is challanged at its root, that is "the full faith and credit of the USA" (and EU).

What is the relationship, if any, to the printing of money and the value of the dollar? Currently, the dollar is dropping in value. But then, oil is also dropping. Normally, these move more or less in line with one another, right? So is there a relationship with things?

Interesting concept. All desires so fully saturated that the psyche is exhausted. Inadvertantly shopping ones self into a Nirvana-like state of lack of want ;)

@Yoyomo-I stumbled upon nine educational videos on the European Central Bank website (ecb.int). I found something similar for the US (federalreserveeducation.com or something close to). You will laugh out loud at the heroic depictions of selfless bankers called into public service for the good of mankind. Actually, maybe I've been too harsh. The stability provided did allow for unprecedented growth up until now. But it was growth created by an unnatural "sugarscape" scenario (oil and credit) that is going to be painful to scale down from. I guess history will have to provide the final perspective on if we went too far.

"What is the relationship, if any, to the printing of money and the value of the dollar"

Come on !! Nobody is printing money. That is a misconception.

Fed does not print money. It plays with monetary system to induce people to borrow more. More credit creates inflation, not more money printing.

Right now, Fed is trying hard, but nobody is interested in borrowing. That is why we have deflation.

Oil is a commodity whose supply can be increased/decreased at will (unless you believe Hell's peak oil nonsense).

Gold is a different type of commodity, because its total supply does not increase/decrease with demand. The amount of gold existing in the hands of people is much larger than what is produced from the mines. That is why gold is a monetary metal and not copper or zinc.

I know, but right now there is overproduction of 'next big thing' ideas. If you come to silly con valley, you will find that billions of dollars have been chasing all kinds of next big ideas. Until that money dissipates, no company with true value will come out.

In the meanwhile, the best one can do is to protect one's own wealth and wait for all those VC companies to get sold at fire-sell prices.

By about age 50 you already have everything you want or need -- or realize that you will never have it and come to terms with what you've got. Almost all people stop being interested in growth or development or change by that age. It's the end of the line for large personal consumption. Everything from there on out is simply maintenance and/or decline. This is why "the demo" in TV ratings for advertising is 18-49; after that age people aren't interested in buying anything but laxatives.

Boomers have reached terminal consumption and there's nobody to replace them. Game over on planet perma-growth.

Just wanted to know if you would be open to selling advertising from your blog to related finance sites. You can contact me through the email address I entered in my blogspot profile. I am contacting you through this comment as I could not find an email address on your blog. Please feel free to delete this comment.

Dink,You know how I feel about growth (yeast in a vat of grape juice) and the species has long ago missed the opportunity to build long term (10K yr) sustainability; except for gold and diamonds, nothing is closed-loop, everything is linear and being/will be depleted. The selfless bankers financed the permanent diminishment of the earth's carrying capacity and I don't share your faith in sci-fi visions of space colonization.

Our species had its shot and blew it and will be forced to downsize by the dwindling availability of resources and accumulating despoilment of the environment. I wonder what Greenie thinks of ground water depletion in India and if 1.1B can be fed without irrigation.

"The amount of gold existing in the hands of people is much larger than what is produced from the mines. That is why gold is a monetary metal and not copper or zinc."

No this is not why gold is a monetary metal. If it was just a matter of people having possession of something in excess of that which could brought up from the earth, many items could concievably be money.

Gold is a monetary metal for reasons that are at once supremely practical and yet ineffable. The supremely practical reason has to do the fact that gold is a very attractive and malleable metal that has virtually no other uses in industrial (or for that matter non industrial) society. This is why silver, zinc, or lead, for example, have never taken on the role of gold, though silver, if you'll forgive the allusion, does act as a sort of Robin to Gold's Batman.

FrancoisThat was 1949, when the Germans basically gave everyone a few thousand dollars and started over again from scratch.They kept taxes low on wages and other earnings to encourage people to invest in reconstruction. They paid for social security benefits by putting a 'mortgage' on all real estate in the country. The earlier mortgages were wiped out when the old money was abandoned.Which is probably what is going to happen here next month...

Is the possibility of a dollar collapse really also an example of the tragedy of the commons? If no other 'responsible' country in the world print their currency AND we do not print it in the US, is it really possible for the US dollar to collapse against another 'responsible' currency?

Wouldn't there only be a 'relative weakening' of any 'responsible' currency vs. another ONLY to the extent that country 1. engages in 'quanititaive easing' and 2. Is an economic basket case?

In other words, as long as we don't print, and the fed is responsible, is it really possible for the dollar to collapse?

You're all forgetting the wild card of the religioue crazies and their anti-science, anti-modern world view. They already control a number of countries in the mideast, and they made great inroads in controlling the US over the last eight years. Don't underestimate them.

Defining "the commons" can get tricky sometimes. Globally, such things as atmospheric pollution or ocean fishing depletion are clearly "the commons". But food grown or items built within one country's borders (and the currency to buy it with) don't seem like "the commons". But then the U.S. has been such an open market maybe we have defaulted into being "the commons". Wish I had a better answer.

Anyhoo, I'm fleeing to San Diego for a week. Leaving tomorrow a.m. Hope you all celebrate Newton's birthday(12/25)merrily. Or a happy Leibniz-kah to those of you who believe in alternate calculus creation theories ;)

Thanks to Hell and all of you for interesting commentary during an interesting year. Viva 2009!

Eat a few fish tacos and Have'a Chips for me when you get home. It still bugs me that I had to give them up when I moved East. Along with eternal life (reincarnation really), they were the greatest gift the Laguna Beach Hari Krishna community ever gave mankind (and probably fair compensation for their kidnapping-brainwashing antics of the past). They are certainly the best tortilla chips on this planet.

In fact, as I think on this- Hell, I have another investment recommendation. I also recommend Have' a Chips as the next great investment and I am putting my money where my mouth is by ordering a box for christmas right now.

Good question. I suspect that it has very little, if any, tradition behind it. And then there may be issues with the amount that exists and that can reasonably be expected to be mined as a by product of mining other metals. I haven't researched platinum enough to say with certainty that this is the case.

As for diamonds, specifically, and other gemstones generally, this is an easy issue. Diamonds are rare relatively speaking, and what's more there are so many grades it would be very difficult to use them as money since one needs to have an expert on hand to determine the worth of a diamond which is based on a complex of at least four factors, clarity, cut, color and carat weight.

Also, and perhaps most importantly gemstones can't be fabricated to show such vital items as minting marks or serial numbers.

What you ask is complicated. The short answer: not exactly. Stick with me for the long-winded analysis.

First, the Federal Reserve will not resist printing. No central bank ever has, and Mr. Bernanke et al. has made it abundantly clear the presses will be humming.

This is a debauch of the currency, pure and simple. This sort of thing has historically ended with a blow-out of the fiat money system; there is no reason to expect anything else to happen in the United States.

However, the entire world is embroiled in long-standing competitive currency devaluation. No one wants the strongest currency, because they imagine their exports will suffer from the relative strength of their money.

So, when the Fed goes nuclear, so will the rest of the world. It's an established trend, and it is wishful thinking to expect that to change.

The US Dollar will collapse because of this; that goes without saying. However, it will bring with it the rest of the world's fiat money systems. Since money is the lifeblood of any economy, this blow-out will bring the entire world economy to its knees.

Soooooo... the US Dollar collapsing is not in and of itself a tragedy of the commons. It is a catalyst for the greater collapse of the world-wide fiat money experiment. Since that will be extremely destructive, that is where you will see a tragedy of the commons.

Deleveraging will be ongoing for many years removing liquidity from commodity and equity markets and forcing a return to basic supply and demand. Oil and natural gas will be returning to longterm trend lines wiping out huge investments by a wide range of financial companies including pension,insurance and banking sectors that will have little then gov't borrowing to fall back on.The role of Middle East oil in funding much of the UK hedge funds has ended along with their regional and emerging market investments.The future belongs to regional manfacturing,food processing,cost effective transportation systems here in the states. Globalization has been hyped by multi-national corporations but after the run up in food and energy cost due to excess liquidity in commodity markets most world gov't will no longer view these contacts as positive and look within for greater reliance on food production and closer attention to financial oversight of equity of commodity operations.

Anon above,Good idea or bad, that's not the point. Isreal depends on continuous transfusions of other people's money to maintain itself and now that the drip tube/gusher hose from the boyz on WallSt will be drying up shortly the shills are out trying to line up a new pool of funds to siphon off.

Dink, it turns out that like all ideas, my fractal views of life/consciousness are not so new in academic circles after all. I was just finished a wonderful book on 'self-referentialist' theory (a significant 'building block' of AI theory and notions of consciousness) by Douglas Hofstadter of Goedel, Escher, Bach fame titled I am a strange loop. I recommend it if you are at all interested.

About Me

I was educated as a chemical engineer but spent almost my entire career in finance, particularly in money, FX and bond markets. The name stands for Hell-as-IOUs and the picture points to Quixotic endeavors.